CDFA considers testimony on whey price

Sacramento County dairy farmer Peter Van Warmerdam, above, took time away from his family dairy in Galt last week to testify at a hearing before the California Department of Food and Agriculture in support of a proposal to align the state’s whey value in milk used to make cheese closer to the price paid to producers under the federal milk marketing order.
Photo/Ching Lee

California dairy farmers and cheese processors faced off once again at a public hearing before the California Department of Food and Agriculture about how much producers should be compensated for whey, a byproduct of cheese production.

The department, which sets minimum milk prices paid to dairy farmers, called the hearing on its own motion, specifically to consider adjustments to the pricing formula for Class 4b, or milk used to make cheese.

Two proposals were submitted: one from the state's three dairy producer organizations—Western United Dairymen, Milk Producers Council and California Dairy Campaign—and the other from the Dairy Institute of California, which represents processors.

During the hearing, producers renewed their call for a more "fair" pricing structure that would align the state's 4b price closer to the Class 3 price in the federal milk marketing order. Cheese makers say setting milk prices at the level producers have proposed would force small cheese plants out of business, stifle investment in new plant capacity and reduce demand for milk while increasing supply.

In her testimony, Annie AcMoody, director of economic analysis for Western United Dairymen, said a change to the state pricing formula is needed because the gap between Class 4b and federal Class 3 is too wide, with the whey value creating the most variance between the two class prices. This growing gap impedes farmers' ability to use risk management tools because of the unpredictability of the spread, she added.

If the producers' proposal had been in place during the past five years, she said, the 4b price would have averaged $1.46 per hundredweight higher, while the Dairy Institute proposal would have increased that price by only 41 cents per cwt.

Even though cheese plants in federal orders can avoid paying the minimum price by depooling, AcMoody pointed out that the Class 3 price is still used as a benchmark to price milk, and California processors should also have to abide by it.

"It is widely recognized that the whey stream has generated considerable revenues for the cheese processing industry," she said. "These revenues should be shared in the pool."

William Schiek, an economist with the Dairy Institute, said producer advocates' assumption that cheese plant margins "are so large that cheese makers can easily absorb and sustain big increases" in the 4b prices is "flat out wrong."

He said most California cheese plants receive no revenue for the whey byproduct and those that do earn some revenue receive less than the value in the 4b formula, which is based on dry whey. Some small- and medium-sized plants have invested in equipment to concentrate liquid whey, which is increasingly sold to other cheese plants for finishing. But he noted most of those small and medium plants still incur a significant disposal cost for the liquid permeate that results from making liquid whey.

The Dairy Institute has proposed changing the whey scale in the 4b formula so that it is no longer based on dry whey but rather on the average of the weekly "Central and West 34 Percent Whey Protein Concentrate-Mostly" prices published by the U.S. Department of Agriculture.

Testimony from producer representatives and dairy farmers also pointed to the tough economic conditions farmers face and how that has been made worse by the drought, which has caused hay and other feed prices to soar.

Despite last year's record-high milk prices, which have since dropped substantially, California dairies continue to close, with a loss of 26 last year, testified Lynne McBride, executive director of the California Dairy Campaign. She gave several examples of dairies that have shut their doors and the factors that led to their decision, including depressed milk prices, rising feed costs, regulatory pressures and lucrative offers from those who want to buy the dairies to grow nut crops.

"We would not continue to see so many of these dairies go out of business if our California pricing system had paid dairy producers a price that was in line with the federal milk marketing order system," she said.

Peter Van Warmerdam, a second-generation dairy farmer in Sacramento County, also touched on the loss of dairies during his testimony, noting how land in his region is increasingly being converted to trees and vines that are more profitable than milking cows.

"You see all these grapes and almonds going in. That's hard to see when you're a dairy farmer," he said, adding that his own family also diversified into winegrapes to earn extra income even though dairy farming is "what we have a passion for."

To illustrate the economic struggles of dairy farmers during the last seven years, Rob Vandenheuvel, general manager of the Milk Producers Council, pointed to CDFA's cost-of-production analysis for dairies in relation to the milk prices they received, showing an average loss of 77 cents per hundredweight and a cumulative loss of $1.38 million for a thousand-cow dairy producing an average of 70 pounds of milk per cow per day.

"While 2014 was a year of strong milk prices that exceeded the cost of producing that milk, in the context of the past several years, we are still an industry trying to recover," he said.

Processors said if there were less milk supply, they would be forced to pay more for it in order to keep their plants running. But several cheese processors, including Jose Sanchez of Los Altos Food Products in Los Angeles County, testified that although dairy farms have closed, milk production has not dropped significantly, indicating a consolidation of farms.

David Ahlem of Hilmar Cheese in Merced County said this trend is not unique to California. Hilmar Cheese CEO John Jeter, who testified with Ahlem, urged CDFA to "step back" and not try to "fix things." The focus, he said, should be increasing demand for California milk, not the regulated price for milk.

The mindset of California dairy farmers has changed, testified Tulare County dairyman Frank Mendonsa. Having endured severe financial hardships in recent years, many producers are not looking to expand, as was the trend prior to 2007. Now, with the drought, limited feed and land, and increasing market volatility, dairy farmers are even more wary about milking more cows, even during a profitable year such as 2014, he said.

CDFA has 62 days from the June 3 hearing date to make a decision. If any change results from the decision, the department has 10 days prior to the effective change to announce the plan.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.